USD Rates: Banking stocks swoon poses dilemma for Fed
The swoon in banking stocks (the KBW index was down by 4.5% overnight) was a stark reminder that First Republic Bank's failure (and subsequent acquisition by JP Morgan) did not end banking sector worries. While JOLTs job openings did miss (actual: 9590k, consensus: 9736k), we doubt that figure would have enough of an impact to drive US Treasury yields 10 to 18bps lower across the curve. 2Y and 10Y Yields are now close to the low end of their recent ranges (3.9% and 3.4% respectively). As written previously, the challenges (high risk-free rates and no blanket deposit guarantee provided) facing small banks are acute. With three bank failures in this cycle, the market appears to be looking at the next target. We do not think the market will be satisfied with what the authorities have delivered. Accordingly, the odds of a Fed pause tonight is non-negligible especially if bank stocks take another meaningful leg lower. As shown by the RBA, the Fed can always opt for caution and hike again in June if needed. Our strategy for USD rates remains unchanged. We hold on to our receive and steepening bias noting that late cycle dynamics are likely in play. Tactically, it might make sense to fade some fade cuts priced out to 2024 while holding to receive in the 3M to 6M tenors in case things go awry.
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